The Production Possibilities Frontier

Introduction

• The Production Possibilities Frontier (PPF) is a graph that shows all possible combinations of two goods when an economy is producing at full potential.– It does not actually show reality, since it assumes

only two goods are produced.– It is a simplification that shows what sort of trade-

offs would be made in reality.– It only shows what can be produced – not what

would be consumed.

PPF for the Country ALPHA

Guns

Butter

A point on the graph represents how much of each item is being produced.

800

800

PPF for the Country ALPHA

Guns

Butter

The frontier shows the limit of what can be produced – all possible combinations when all resources are fully utilized.

PPF for the Country ALPHA

Guns

Butter

1500

All resources are being used to produce guns.

PPF for the Country ALPHA

Guns

Butter

1500

2000

All resources are being used to produce butter.

Usually a point is chosen where both items are being produced:

PPF for the Country ALPHA

Guns

Butter

1100

1500

Production may occur anywhere on or within the frontier.

It may NOT occur beyond the frontier– there are not enough

resources to do so.

PPF for the Country ALPHA

Guns

Butter

AAt point A (and at any point on the frontier), production is EFFICIENT.

Efficient production means that all resources are being fully employed to produce the most goods and services

possible.

Therefore it is impossible to produce more of one item without producing

less of the other.

PPF for the Country ALPHA

Guns

Butter

B

At point B (and at any point inside the frontier), production is INEFFICIENT.

Inefficient production means not all resources are being fully employed – it is

still possible to increase production of both goods.

This could occur during a recession or depression, or in a developing

country.

The PPF can be used to show tradeoffs.

Any two or more points on the frontier represent tradeoffs.

PPF for the Country ALPHA

Guns

Butter

A

B

A and B represent tradeoffs. A produces more guns, B produces more butter.

The PPF can be used to show the opportunity cost of choosing one

alternative over the other.

PPF for the Country ALPHA

Guns

Butter

A

B

1400

800

1700600

The opportunity cost of A equals the decrease in butter: 1100 units.

PPF for the Country ALPHA

Guns

Butter

A

B

1400

800

1700600

The opportunity cost of B equals the decrease in guns: 600 units.

The PPF can also show economic growth by moving outward.

This may occur due to additional resources, increasing population, or

new technology.

PPF for the Country ALPHA

Guns

Butter

Growth

Review

• Any point on the graph shows how much of both goods is being produced.

• Efficiency is shown by whether the point is on the curve (efficient) or within the curve (inefficient).

• Tradeoffs are shown by any two points on the curve.• Opportunity cost is shown by the decrease in one

good when the other is increased.• Growth is shown by the frontier moving outward.